Storytelling Recession

“The more you leave out, the more you highlight what you leave in.”

-Henry Green


In the spirit of The Great #Deflation Risk, I’m finding some eerily relevant quotes from the 1930s these days. Green was an English author best known for his 1939 novel titled Party Going. What a capital markets bender this #SuperLateCycle US economic story has been!


As you can see in today’s Chart of The Day, M&A is what we call a classic pro-cyclical #Bubble indicator (peaks at the end of an economic cycle). That makes complete sense. When top-down Global and US GDP growth slows, companies try to buy growth and/or “synergies.”


In case you didn’t know, “synergies” means firing people. This is why Jobless Claims rising above 300,000 is one of the Top 3 US Recession Indicators – the other 2 (already happening) are Consumer Confidence rolling off its cycle peak, and Corporate Profit #GrowthSlowing.


Storytelling Recession - Fed cartoon 10.27.2015

Hedgeye CEO Keith McCullough will host a LIVE + INTERACTIVE online event today at 2:10pm ET offering immediate market reaction and commentary on the Fed statement. Click here to watch. 


Back to the Global Macro Grind


Not surprisingly, this week’s US economic data has been more of the same (i.e. the #GrowthSlowing bottom is not in):


  1. US New Home Sales for SEP missed (slowed)
  2. US Durable Goods (-3% y/y) remain in a recession, missing/slowing again
  3. US Consumer Confidence slowed to 97.6, right on time, from its #LateCycle peak in Q2 of 106


Since US Employment growth (Non-Farm Payrolls) peaked in Q1 of 2015 and US Consumption growth peaked in Q1, should it surprise anyone that Q3 and Q4 are going to be #GrowthSlowing quarters for both US employment/consumption and US corporate profits?


Even the most over-owned stock in human history (AAPL) is slowing. I’m sure that has nothing to do with why it looks “cheap.”


While there’s obviously a recession in Durable Goods, Inflation Expectations, Emerging Markets, etc., there’s a less subtle recession developing in US stock market storytelling.


While I was driving to hockey practice (after the market close) last night, I heard back to back Fast Monkeys on CNBC say this about Twitter’s (TWTR) quarter: “I’m long the stock and the guidance isn’t what I wanted to see, but you definitely have to buy it down here.”


At that point the stock was down 8-10%. They kept reading the corporate headline of “ad engagements” being up. Meanwhile their pricing was down -39% year-over-year. #lol. Thanks for coming out guys.


Imagine that. The ad-cycle has pricing pressure, as the US economic cycle slows from a 77 month peak…


In other #Deflation Risk news:


  1. Oil & Gas Stocks (XOP) led losers in the US stock market yesterday closing -2.9% vs. the Russell 2000 (IWM) -1.1% on the day
  2. US Transportation Stocks (IYT) were a close 2nd to last in terms of US Sector Style Factor exposure, closing -2.7% on the day
  3. Biotech (IBB) led gainers +3.1% on the day ahead of Gilead (GILD) reporting at the closing (and falling -2% on the news)


Yeah, #NoWorries. Everything you had to be long for the 1st two weeks of October has gone straight down in the last 3 trading days post the Draghi Devaluation => USD Up Deflation. And Healthcare Stocks just “outperformed”, for a day.


But but, the SP500 is “flat” for the YTD…


True. It was in 1987 too. And the only problem with “flat” is that everyone and their brother was looking for it (and interest rates) to be up this year. Oh, and many many funds aren’t “flat” (they’re down YTD) because most of the internals are down.


Another way to look at “internals” is this thing called market breadth. If you look at the stocks that were “up” on the day yesterday on the NYSE (New York Stock Exchange), the number was 25% (versus 72% of stocks being down on the day).


With the Russell 2000 and SP500 down -11.6% and -3.1%, respectively, from their all-time #Bubble peaks, you can tell me a story about unicorns, but I don’t buy it. There’s a recession in the credit quality of that narrative too.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:


UST 10yr Yield 1.98-2.09% (bearish)

SPX 1 (bearish)
RUT 1135--1176 (bearish)
DAX 96 (bearish)

VIX 13.41-19.96 (bullish)
USD 95.82-97.44 (bullish)
EUR/USD 1.10-1.13 (bearish)
YEN 119.08-121.39 (neutral)
Oil (WTI) 44.24-46.31 (neutral)

Nat Gas 2.19-2.41 (bearish)

Gold 1150-1175 (bullish)
Copper 2.30-2.41 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Storytelling Recession - 10.28.15 EL chart

October 28, 2015

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The Fed, Oil and China

Client Talking Points


After consensus was calling for a “rate hike”, the latest bull case for U.S. stocks is that the Fed doesn’t hike – got it? Roger that. After New homes, Durable Goods, and Consumer Confidence all slowing this week, UST 10YR Yield = 2.03%.


Oil was slammed by ECB President Mario Draghi’s Devaluation, closing down another -1.8% yesterday (WTI), taking it to -5.2% in the last week alone. Oil is still very much in crash/deflation mode down -47% year-over-year; carnage in Oil & Gas stocks (XOP) -2.9% yesterday too.


Apple is slowing in China, but Chinese GDP is 6.9% right? Right. The Shanghai Composite failed (like most things EM have in the last week) @Hedgeye TREND resistance and closed -1.7% overnight (#Deflation = bear market in EM).


***Keith McCullough will host a LIVE + INTERACTIVE online event today at 2:10pm ET offering immediate market reaction and commentary to the Fed. CLICK HERE to watch.



Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

What week it was for MCD shareholders! Shares finished the week up 7.3%. We have been saying all along that the third quarter of 2015 would be the inflection point for the McDonald’s (MCD) turnaround. After this print, it appears that the heartache is finally over at McDonald’s, as this quarter marks the first good quarter the company has had in two years.


From here, the upside in the stock price lies with the growth of All Day Breakfast, additional G&A cuts, national value offering implementation, reimaging of restaurants, commodity deflation, especially in beef and increased operational efficiencies, among others. In addition, the REIT is a potential driver of incremental value but not crucial to the long-term success of this call. With Steve Easterbrook at the helm we are confident this company will be better managed than it has been in a long time.


RH unveiled a full floor of Modern product in their New York Flatiron store this week. The new concept sits on the first floor of the 21k sq. ft. store and marks the 3rd property in RH’s fleet (along with Denver and Atlanta) to carry the new product line.


Fundamentally and financially, we’re about to see growth at RH go on a multi-year tear. We think this stock is headed to $300 over the next 2-3 years. We’ve been patient for the catalyst calendar to begin, and the waiting is finally over.


As devaluation and global currency war jockeying from central bankers around the world continues, the acknowledgement of growth slowing continues to push yields lower. The long-bond was up on Thursday, after the ECB meeting, despite an easing-fueled rip in equities. The bond market doesn’t believe in the growth storytelling and we expect it to continue.


Remember that Down Euro Devaluation is a global TIGHTENING event because the world’s biggest asset price #deflation risk is that the world’s inflation expectations (commodities, debt, etc.) are DENOMINATED IN DOLLARS. That has implications for gold (risk to being long), but we want to get through the Fed meeting and GDP data next week before we pivot on a gold view. Stay tuned.

Three for the Road


SPECIAL EDITION: McCullough Answers 4 Macro Questions From Elmo… via @KeithMcCullough



Everyone has a fair turn to be as great as he pleases.

Jeremy Collier


The Durable Goods headline number for September was down -1.2% and the August figure was revised from -2% to -3%.  Notably, down -3.0% year-over-year with year-over-year growth negative for the 8th consecutive month and in 10 of the last 11 months.  

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REPLAY: "Fed Day Live" with Keith McCullough

In case you missed it... Hedgeye CEO Keith McCullough and macro analyst Darius Dale hosted a LIVE + INTERACTIVE online event offering market commentary following the latest FOMC statement. McCullough also distilled the biggest global economic risks and explained how to position your portfolio going forward.






Is the Bear Market Priced In?

From NYC/CT to California to Chicago, Keith and I have been on the road facilitating discussions with clients and prospective clients for much of the ~3 weeks since our Q4 Macro Themes Call. As always, the discussions were candid and brimming with thoughtful analysis on both sides of the bull-bear debate. In terms of aggregating sentiment, I find that gauging buyside consensus is substantially easier now than it has been at any point over the past few years:


  • Equity and fixed income investors alike are fairly bearish – at least rhetorically. Much of that bearishness is a function of the now-obvious global industrial recession and domestic earnings recession we’ve been calling for at Hedgeye.
  • Relative to the amount of pushback we received 3-6 months ago, investors are at least willing to entertain the thought that we may be proven right in our assertion that the U.S. economy is indeed #LateCycle.
  • Still, most investors ultimately disagree with the aforementioned conclusion and don’t view the U.S. economy has having enough “speculative excesses” to support recessionary-like declines in economic and capital markets activity. Moreover, there exists a near-universal degree of consensus regarding the [overwhelmingly positive] outlook for the U.S. consumer.
  • With respect to the Fed, many investors place higher odds on QE4 than they do on eventual “liftoff”, which ultimately supports a generally sanguine outlook for “risk assets”.


Hopefully this synopsis is helpful, but to the extent you view these summaries as known-knowns, you may find additional value in our responses to what our team viewed as the key points of contention to our existing views:


  1. Great call nailing the domestic and global growth slowdown, but with the S&P 500 now down only a few percent from its all-time high, was everything you called for priced in at the August lows?
  2. Why won’t bad news continue to be good news for risk assets?
  3. In the U.S. household balance sheets are healthy, house prices are accelerating and gas prices are falling. Why won’t the U.S. economy and the domestic equity market weather the storm of international growth and earnings headwinds – much like they did in 1998?
  4. When citing your economic cycle timing indicators, how do you know that current signals aren’t false positives, rather than soundly in support of your view that the probability of a U.S. recession commencing by mid-2016 is high and rising?


See below for our detailed responses to each question. As always, feel free to reach out with any follow-up questions.


Best of luck out there,




Darius Dale





Q: Great call nailing the domestic and global growth slowdown, but with the S&P 500 now down only a few percent from its all-time high, was everything you called for priced in at the August lows?


A: Fair question, but we continue to think we are in the early innings of a series of lower-highs for the U.S. equity market.


Moreover, it’s a mischaracterization to cite the S&P 500’s minimal draw-down as indicative of the pain being felt by the preponderance of investors. For example, the HFRX Equity Hedge Fund Index is down nearly -6% from its YTD high in April. Moreover, 62% of stocks in the Russell 3000 Index (~98% of investable public equity market cap) are below their 200-day moving average (CHART). Worse, the mean and median YTD-peak-to-present drawdown of these 3,015 tickers is -25.2% and -20.2%, respectively (CHART). Recall that we initially warned of the dour implications of declining breadth in our 7/20 note titled, “Dangerous New Highs for the Market?”.


All told, we think it’s risky for investors to assume the coast is clear as a result of navel-gazing at the S&P 500, DOW or NASDAQ when the preponderance of single names are resoundingly signaling incremental deterioration of both top-down and bottom-up fundamentals.


Like Rome, this bear [market] wasn’t built in a [trading] day…





Q: Why won’t bad news continue to be good news for risk assets?


A: Given the pervasive level of bearishness I mentioned at the onset of this note (largely perpetuated by the terrible SEP Jobs Report), “risk assets” are once again trading inversely to policy rate expectations after a lengthy hiatus (CHART). Investors are clearly betting that their returns will be spared by a continuation of dovish policy and/or guidance out of the Federal Reserve.


But is the “don’t-fight-the-Fed” mantra an appropriate risk management overlay in every scenario? Historically speaking, the Fed has proven to be impotent at arresting #Quad4 deflationary pressures and/or the general credit risk associated with slowing economic growth (CHART, CHART). Moreover, the ECB and BoJ’s entry into the global currency war has made it much harder for the Fed to sustain #DownDollar asset price reflation (CHART, CHART). Lastly, the Fed has yet to prove it can suspend gravity during an actual economic downturn (CHART, CHART).


Importantly, our work continues to point to a rising, not falling, probability of the aforementioned bearish catalysts materializing:


  1. After moving to neutral from a ~15 month-long short/underweight bias on reflation assets, we now think another bout of #GlobalDeflation is just around the corner. Click on the following links to review the supporting analysis: “Risk Managing the Shift to #Quad3 – Especially in Energy” (10/8) and “Are You Prepared for a Deepening of the Global Earnings and Industrial Recessions?” (10/22).
  2. We think there is a greater than two-thirds probability the U.S. economy enters recession over the NTM. This compares the preponderance of investors pegging those odds at only 22% per a recent CNBC survey. Click on the following link to review the supporting analysis:


All told, we think the economic cycle ultimately wins out. While betting on QE to carry “risk assets” to new highs has proven to be a profoundly profitable exercise for investors during an economic expansion, we don’t recommend holding the bag when the growth music stops during what are now precariously illiquid securities markets (CHART). Most investors failed to forsee the 2000 and 2007 market tops and we expect most investors will continue to miss their opportunity to risk manage the 2015 vintage.


Tops are processes, not points. It’s never obvious to the crowd until it’s far too late…




Q: In the U.S. household balance sheets are healthy, house prices are accelerating and gas prices are falling. Why won’t the U.S. economy and the domestic equity market weather the storm of international growth and earnings headwinds – much like they did in 1998?


A: First and foremost, we would be remiss to do anything other than concede the aforementioned premises:


  1. Household balance sheets are indeed healthy (CHART);
  2. Home prices are indeed accelerating (CHART); and
  3. Gas prices are indeed falling (CHART).


That said, however, the U.S. economy had something working for it in 1998 that is now decidedly a headwind to consumption growth surmounting a demonstrable acceleration to cycle-peak base effects in the four quarters ending in 2Q16 (CHART) – demographics.


Specifically, U.S. consumption growth (and ultimately the U.S. economy) was able to remain resilient in 1998 largely due to rising demand from baby boomers “graduating” up the life-cycle consumption and income curves (CHART, CHART). Now the U.S. consumer at large is decidedly scaling down the backside of that curve with no reprieve from the millennial generation until 2019.


Perpetual 2.0-3.5% population growth in the 35-54 year-old cohort during the 1980s and 1990s might just be the greatest demographic dividend ever experienced in the western hemisphere. From the longest of long-term perspectives, “comping” that “comp” might just be the most damning component to Consensus Macro’s perpetual expectations of 3-4% U.S. GDP growth.


Now with employment growth slowing on a trending basis (CHART), investors have no choice but to wonder how where incremental [sub-prime] auto loan demand is going to come from. The risk to investors is that many failed to realize just how good the current cycle has been amid perpetually misguided expectations of a return to prior peaks.


All told, real household consumption growth has already negatively inflected (CHART) from its cycle-peak growth rate and growth in the [much-larger] services side of the U.S. economy appears likely to follow the manufacturing and export sectors lower in the coming months (CHART, CHART, CHART, CHART, CHART, CHART).


Lastly, let us not forget the inconvenient truth this is the S&P 500 experiencing a near -20% crash during 1998 (CHART). The SPY would have to drop roughly -17% from today’s closing price for the “it’s 1998, not 2000 or 2007” bullish narrative to get fully priced in…





Q: When citing your economic cycle timing indicators, how do you know that current signals aren’t false positives, rather than soundly in support of your view that the probability of a U.S. recession commencing by mid-2016 is high and rising?


A: We don’t. The entire point of investing would appear to be betting on what one’s analysis labels as a probable outcome becoming increasingly probable and ultimately getting priced into the market by other investors who subsequently arrive at a similar conclusion(s). It would seem silly for a bottom-up analyst to do a ton of work on a name only to take the other side of his/her own analysis. Macro investing isn’t any different…


This we do know:


  1. Most investors and the Fed do not expect a recession next summer.
  2. Most investors and the Fed are beyond terrible at forecasting GDP. Review our 9/2 note titled, “Early Look: Do You QoQ?” for more details.
  3. The signals suggest the probability of recession commencing at some point over the NTM is rising, not falling.
  4. The preponderance of high-frequency economic data continues to slow on a trending basis (CHART), as well as consistently surprise consensus expectations to the downside (CHART) – thereby increasing the aforementioned probability at every interval.
  5. Various read-throughs from capital markets activity – including peak M&A and buyback announcements, widening credit spreads (CHART), etc. – are confirming the rising probability of recession as well.


The confluence of the factors listed above support maintaining our current defensive posture with respect to our active Macro Themes and preferred factor exposures on the long and short side. When the fundamental, quantitative and behavioral inputs are no longer supportive, we will adjust accordingly.




  • Long-term Treasury Bonds (TLT*, EDV, ZROZ)
  • Municipal Bonds (MUB*)
  • Utilities (XLU*)




  • High Yield Credit (HYG, JNK)
  • Financials (XLF*)
  • Retailers (XRT*)
  • Small Caps (IWM)

***An asterisk denotes current Macro Playbook exposure. Long Housing (ITB), Short S&P 500 (SPY) and Short Spain (EWP) round out the list.*** 


All told, we aren’t raging bears. We aren’t calling for Lehman-style a collapse in asset markets. We are simply calling for a run-of-the-mill #LateCycle Slowdown in which inflation and capital expenditures peak and roll first, followed by employment growth and ultimately by consumer spending.


Textbook macroeconomics…

Cartoon of the Day: Fed Fortune-Telling

Cartoon of the Day: Fed Fortune-Telling - Fed cartoon 10.27.2015

We don't place a great deal of faith in the Fed's forecasting abilities here at Hedgeye. Actually, we don't place any faith whatsoever in the Fed's forecasting abilities.  

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